Should Law Firms accept Virtual Currency? Only if they immediately convert to USD! was published by JD Supra on 7/10/18.
Law Firms, like other businesses, want to be able to offer more services to more clients expanding; the scope of their reach. This might entail entering the world of Virtual Currency (VC) and accepting payments such as Bitcoin. The use of VC has universally surged. According to news reports, more payments are being made with VC. Law Firms want to stay competitive and compliant. They are aware that this is a cashless society where business is conducted remotely and where relationships with clients are no longer “traditional”. And, Law Firms want stability. They want to avoid risk, valuation fluctuations and volatility as it relates to their own revenue and their client’s money in trust accounts.
Lawyers can charge their clients via VC as long as they ‘instantaneously” exchange the VC into USDs
The Nebraska Supreme Court appointed an Ethics Council and on September 11, 2017, Nebraska became the first state to issue an ethics opinion (NEBRASKA ETHICS ADVISORY OPINION FOR LAWYERS NO. 17-03) regarding lawyers charging their clients in virtual currency (https://supremecourt.nebraska.gov/sites/default/files/ethics-opinions/Lawyer/17-03.pdf). The questions presented to the Nebraska Ethics Counsel were:
- May an attorney receive digital currencies such as bitcoin as payment for legal services?
- May an attorney receive digital currencies from third parties as payment for the benefit of a client’s account?
- May an attorney hold digital currencies in trust or escrow for clients?
In Summary, the Nebraska Advisory Opinion NO. 17-03 pursuant to Nebraska law states that:
- “An attorney may receive and accept digital currencies such as bitcoin as payment for legal services and should mitigate the risk of volatility and possible unconscionable overpayment for services by: (1) notifying the client that the attorney will not retain the digital currency units but instead will convert them into U.S. dollars immediately upon receipt; (2) converting the digital currencies into U.S. dollars at objective market rates immediately upon receipt through the use of a payment processor; and (3) crediting the client’s account accordingly at the time of payment”.
- “An attorney may receive digital currencies as payment from third-party payors so long as the payment prevents possible interference with the attorney’s independent relationship with the client or the client’s confidential information by implementing basic know-your-client (“KYC”) procedures to identify any third-party payor prior to acceptance of payments made with digital currencies”.
- “An attorney may hold bitcoins and other digital currencies in escrow or trust for clients or third parties so long as the attorney holds the units of such currencies separate from the lawyer’s property, kept with commercially reasonable safeguards and records are kept by the lawyer of the property so held for five (5) years after termination of the relationship. Because bitcoins are property rather than actual currency, bitcoins cannot be deposited into a client trust account”.
This requires immediately converting VC third party payments to USDs before crediting the USDs to a client’s account, including client fund’s held in trust accounts to eliminate volatility and uncertainty.
There are secure on line platforms delivered by payment processors such as BitPay that can provide an “instant exchange” from Bitcoin to USDs; eliminating conversion and timing issues that an entity – such as a Law Firm – accepting VC as payment may potentially experience. Processors like BitPay, instantly converts Bitcoin into USDs; providing a shield from volatility risk. The payments to the Law Firm then come in the form of a direct deposit. There is also a potential transactional benefit to accepting VC. The transaction fees for Credit Cards range from 2% to 3%. Transactions costs associated with VC – settlement charges – can be as low as 10 basis points (1/10 of 1%).
Don’t be a victim of your own making
Accepting VC as a form of payment by eliminating rate conversion risk can be perceived as a client accommodation, convenience factor, differentiator from the competition or just simply – getting your name out there. Due to multiple applications of Blockchain technology, it is estimated that the use of VC will become more common (indicative of a larger trend) in the legal profession over time. Moreover, the recent letter from the American Institute of CPAs to the IRS recommending that IRS release immediate guidance regarding the tax treatment of VC transactions, (similar to that of IRS Notice 2014-21 so that authoritative guidance exists), demonstrates that VC is here to stay.
Law Firms, and businesses in general that accept Bitcoin as a form of payment need to be technologically proficient and understand potential risks that may be associated with accepting payments from a Payment Processor. Lawyers ought to understand financial technology and be able to manage clients’ expectations, – particularly, since the Law Firm will not be “holding” the VC directly, but rather “converting” the VC instantaneously. And, many Law Firms are currently serving and representing clients in the VC “space”; so these Law Firms have to demonstrate that they understand the VC industry.
Consult your specialized tax advisor if you are considering accepting VC as a form of payment for services and or good delivered or sold.